WASHINGTON, Oct 4 (Reuters) - An economic leader in the U.S. Congress on Tuesday suggested stripping the Federal Reserve of its mandate to maximize employment, leaving it to focus on monetary policy, and said he would soon introduce a bill to shrink the central bank’s responsibilities.
“While some may mistakenly claim that a single mandate means maximizing employment is unimportant, history proves the best way for the Federal Reserve to maximize employment is to focus on achieving long-term price stability,” said Texas Rep. Kevin Brady at a hearing of the Joint Economic Committee.
“Monetary policy affects prices. In contrast, budget, tax and regulatory policies affect real output and jobs,” he also said.
Brady said Congress also needs to change how the U.S. dollar’s exchange rate works and that the responsibility should be moved to the central bank.
“By controlling the money supply, the Federal Reserve directly affects the foreign exchange value of the U.S. dollar. Moreover, swings in exchange rates influence domestic prices,” he said.
The Federal Reserve has had a dual mandate to achieve price stability and full employment for more than 30 years. With the national unemployment rate refusing to fall below 9 percent, some questioned how effective the central bank can be in getting unemployed Americans back to work.
Brady said his legislation would also address the issue of inflation.
“Under a single mandate, the Federal Reserve would publicly announce an inflation target (and) the Federal Reserve would retain full operational independence from both Congress and the President to achieve that inflation target,” he said.
The statements came as Fed Chairman Ben Bernanke testified before the committee, which is made up of equal membership from both chambers of Congress and both parties.
Republicans, who are more skeptical of the Federal Reserve’s authority, control the House of Representatives and could welcome Brady’s legislation. Democrats still control the Senate and may be colder to the prospects of a bill limiting the opportunities to address the jobs problem.
Reporting by Lisa Lambert, Editing by Chizu Nomiyama